Schaeffer's Investment Research

DEC 27, 2012 3:10 PM

UPS has seen a flurry of front-month options activity.

Package delivery concern United Parcel Service, Inc. (NYSE:UPS) -- often viewed as an economic bellwether -- has followed the broader equities market lower today, and is on pace to end beneath its 10-day and 20-day moving averages for the first time in more than a month. Against this backdrop, it looks like a few option bears are cashing in their chips, while the bulls are gambling on a short-term rebound.

In early afternoon trading, UPS has already seen roughly 15,000 calls and 7,500 puts change hands -- more than three times its average intraday volume of fewer than 4,100 calls and 2,100 puts. The front-month January 2013 series of options is most popular on both sides of the tape, indicating accelerated short-term gambling.

On the bearish side, the January 2013 75-strike put is most active, with more than 1,700 contracts exchanged. The majority of the in-the-money puts have traded at the bid price, pointing to seller-driven volume. Or, in other words, it appears the 75-strike put holders are taking profits in the wake of UPS' decline.

On the bullish side, traders have shown an affinity for the January 2013 75- and 77.50-strike calls, which have each seen around 4,500 contracts cross the tape. A healthy portion of the calls traded at the ask price, and implied volatility was last seen higher at both strikes, hinting at buy-to-open activity.

By purchasing the calls to open, the speculators are expecting UPS to bounce back atop the strikes within the next few weeks. More specifically, the volume-weighted average price (VWAP) of the 75-strike calls is $0.61, meaning the buyers will make money if UPS conquers the $75.61 level (strike plus VWAP) within the options' lifetime. Meanwhile, the VWAP of the 77.50-strike calls is $0.10, indicating a breakeven level of $77.60 -- in territory not charted since July.

Widening our sentiment scope, we find that today's affinity for long calls marks a change of pace for UPS. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.28 registers in the 84th percentile of its annual range, suggesting option buyers have picked up puts over calls at a much faster-than-usual clip during the past couple of weeks.

In similar fashion, the security's Schaeffer's put/call open interest ratio (SOIR) -- which measures options expiring within three months -- stands at 0.84, just 14 percentage points from a 52-week peak. Or, in simpler terms, near-term options players are more put-skewed than usual right now.

As alluded to earlier, the shares of UPS are struggling on the charts, giving up 1.8% so far this week. Late last week, the stock ran into a wall at its formerly supportive 200-day moving average, and is in danger of ending beneath the aforementioned 10-day and 20-day trendlines for the first time since November 20.